American Vanguard Corporation (AVD) Q2 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the American Vanguard Corporation Second Quarter 2012 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bill Kuser, Director of Investor Relations for American Vanguard Corporation. Thank you. Mr. Kuser, you may now begin.

Well, thank you very much, Rob, and welcome everyone to American Vanguard's second quarter and first half 2012 earnings review. Our speakers today will be Mr. Eric Wintemute, Chairman and CEO of American Vanguard; and Mr. David Johnson, the company's Chief Financial Officer. Before beginning, let's take a moment for our usual cautionary reminder. In today’s call, the company may discuss forward-looking information. Such information and statements are based on estimates and assumptions by the company’s management and are subject to various risks and uncertainties that may cause actual results to differ from management’s current expectations. Such factors can include weather conditions, changes in regulatory policy, competitive pressures and various other risks that are detailed in the company’s Security and Exchange Commission reports and filings. All forward-looking statements represent the company’s best judgment as of the date of this call, and such information will not necessarily be updated by the company. With that said, we turn the call over to Eric.

Thank you, Bill. Good morning, everyone, and welcome. Thank you for joining us as we report on a very successful second quarter and first half of 2012. David and I welcome this opportunity to tell you more about our excellent performance and the prospects that we see on our horizon. We will let David give you all of the operating and financial metrics, but I want to start by providing a brief overview. Quarterly revenues were up 6%, gross profit margins expanded to 45%, operating expenses were held to 28% of sales and the all-important bottom line, net income, grew 46% over last year's second quarter. As David will describe, our balance sheet remains very strong at mid-year with $48 million in cash, reduced debt and stockholders' equity increasing by over 10% in the first 6 months of 2012. So the main themes of our 2012 performance are: Solid top line growth, improved profitability and a very strong balance sheet. With that overview, I will now turn the call over to David, who will cover the financials and operating details. I will then return with additional comments about the recent U.S. drought conditions and other factors that we see shaping the balance of 2012 and beyond. David?

Thank you, Eric. As Eric has mentioned and as you will read in our earnings announcement, sales for the second quarter of 2012 increased by 6% to $85 million as compared to $80 million in 2011. Within this number, our crop sales were up nearly 3% to $75 million and our non-crop sales were up about 40% to $9.5 million. You will see in the 10-Q that our export sales continue to grow strongly and are up 18% quarter-on-quarter. In our 10-Q filing scheduled for tomorrow, you will see a detailed description of sales by product groups. In summary, insecticides recorded sales of approximately 32% in comparison for the same quarter of the prior year. This group was driven by very strong demands at Thimet, Nemacur and Bidrin. Our herbicides, fungicides and fumigants product group was down 29% in the quarter, since we largely sold out the inventory of our post-emergent herbicides impact during the prior 2 quarters. This shortfall was somewhat offset by a strong increase in our specialty crop's herbicides, Dacthal. Within crop, our other sales were down by 17% quarter-on-quarter, largely due to the lower Folex sales as a result of a supply limitation in the second quarter. This is being solved by putting in place additional manufacturing capacity at our Axix, Alabama facility that has come on stream at the start of Q3 2012. Our non-crop sales performed very well ending about 40% above last year at $9.5 million. The increase was due largely to sales of our mosquito adulticide, Dibrom, which rose in light of wet conditions in both the mid-Atlantic and Southeast regions. Our gross margin in the quarter was 45% of net sales, as compared to 40% during the second quarter of 2011. This was the result of improved pricing, a strong mix in sales and factory performance that was in line with the strong prior-year performance. Operating expenses increased in the quarter by 15% as compared to last year. This is largely attributable to general and administrative expenses driven by higher legal costs; increased incentive compensation accruals, as a result of the company's strong financial performance; and costs related to establishing a new international structure. Our freight costs increased primarily as a result of our continued expanding international business. As I have mentioned on previous calls, we track operating expenses as a percentage of sales. These costs are at 28% in the second quarter, which is in line with our 2011 full year performance, though higher than the 26% recorded for the same quarter of the prior year. The net result of these dynamics is operating income of $14.2 million versus $10.7 million this time last year, an improvement of 33%. Our effective interest rate for the period is 4.2%, as compared to 4.8% for the second quarter of 2011. In our 10-Q statement, we have expanded the disclosure on this expense to provide greater insight into the key elements. You will see that our bank interest rate is higher than last year, primarily as a result of having in place the required fixed interest rate swap derivative for the full quarter as opposed to a partial quarter last year. In addition, other interest cost, primarily the amortization of discounting on deferred payments, are lower because we have made some of the related payments. Income before tax improved to $13.6 million from $9.7 million, an increase of 40%. Our effective income tax rate is 35.8%, compared to 38.2% last year. The primary driver for the reduction in the company's effective tax rate is stronger financial performance, which has in turn increased the benefit derived from the domestic manufacturing incentive, which is a result of our Made in America business model. As noted by Eric in our earnings announcement, our net income has increased 46% and our earnings per share has increased to $0.30 per share from $0.22 last year. It is great to reflect for a moment that this is the best second quarter sales and net income performance in company history. Now I would like to turn my attention to a brief review of the financial performance for the first 6 months of 2012. Year-to-date, our sales are up 18% at $172 million including export sales, that are up 51%. Eric will comment in a moment on the establishment of our new international structure in the Netherlands. We are expecting this new business unit to put us in a better position to drive even stronger international growth in the future. During the first half of 2012, our performance on pricing has been firm, the mix of product has been positive and further improvements in manufacturing performance has resulted in reporting gross margins of 44% as compared to 40% last year. Furthermore, we continue to focus on controlling operating costs and these have remained in line with the 27% of sales achieved last year. As a result, we have recorded operating income of 44% at $28.6 million. Interest expense is reduced as we have continued to pay down both term debt and other deferred payments on the product line acquisitions. We're also pleased to report that we have now achieved a full 12 months without accessing our working capital revolving credit line. As you will have seen in our financial statement, our closing cash position at June 30, 2012, is $48 million which is certainly a record for the company. You will also see in the financial statement that income tax is at 31.6% -- 36.1% year-to-date as compared to 37.4% for the same period of 2011. This is again as a result of our American manufacturing presence. Net income is much improved at $17.4 million which is an increase of 59% in comparison to last year. Our earnings per share is at $0.61 as compared to $0.40 last year. It is worth noting that our net income has increased to 10.2% of sales as compared to 7.5% last year. Our target has been to achieve 10%, so we are now figuring out our next target. This half year sales and profit performance is significantly better than any previous first half performance recorded by the company. Our balance sheet continues in very strong condition. This includes continuing -- continued improvement in the shareholders' equity, which grew about 10% during the first 6 months of 2012 and you get [ph] $206 million including having made the $0.05 dividend payment. The key elements of our working capital are inventory receivables, programs and payables. These are all performing well this year. Our inventories ended the quarter marginally lower than last year at $80 million as compared to $81 million, which, given the very strong demand we are working through this year, is a tribute to careful attention to detail across our organization. Our receivables ended at $73 million in comparison to $75 million this time last year, which we considered to be a good result given the strong growth in both domestic and export sales. It is also a tribute to the quality of our customer base that enables us to maintain this performance. Our payables are in line with the level achieved last year, which underlines the comments I've made about carefully managing inventories. Finally, our program accruals are much higher this year, which is driven by the very strong demand we have seen in the season for our corn products. As you will see from the cash flow statement, we are spending capital in the early part of the year. This is focused on equipping our manufacturing sites to produce additional steps in certain products acquired in 2010. Because of this careful management of cash, even during the early part of our annual cycle, we have been able to cover our working capital needs and invest significantly in our manufacturing facilities. Finally, because of our overall financial performance, we continue to be in position to borrow up to the maximum allowed under our credit facility. With that, I hand back to Eric who will close with some comments about weather-related issues and our sales and marketing initiatives.

Thank you, David. There are many criteria that can influence the volume of our business and weather is clearly one of those factors. As such, I'd like to discuss drought conditions in the United States that have been the center of considerable media and investor focus. Fortunately, these drought conditions have had little effect on our performance thus far in 2012, and we expect that even if such conditions continue a bit longer, they should have limited effect on our second half results. Furthermore, this drought may actually stimulate demand for our products next spring as growers try to make up for this year's yield shortfall with increased yields in 2013. As you know, our largest product category, granular soil insecticides, and, particularly, those used in corn, are generally applied at the time of planting in the spring. So long before the effects of this year's drought occurred, the sales and use of these products had already been completed. Looking forward, continued hot, dry weather could influence the sales in the third quarter if reduced pest pressure for above ground insects, such as plant bugs in cotton, causes wider usage of our foliar cotton insecticide Bidrin. Bidrin sales have been strong through the second quarter since early season pest pressure was significant. During late June, such pressure subsided due to the tremendous heat. But in the last 2 weeks, pest pressure has increased and additional strain is underway. It is also clear that just like last year, several million acres of planted cotton in the U.S. may not survive the drought, and therefore, will not be harvested. As a result, it is possible that demand for our harvest aid, defoliant Folex, could be reduced. If weather throughout the Southeast cotton region remains extremely hot and dry, cotton foliage tends to fall away from the cotton ball unless defoliant is required to facilitate mechanical harvesting. However, if the weather moderates to a more normal, cool, moist autumn trend, then higher concentrations and/or multiple applications of Folex would be required to remove the leaves. This is what happened last year in Georgia and the Carolinas, which resulted in a strong performance year for this product despite the reduced acreage caused by the drought of 2011. So it is September's weather in this geographic region that will tell the story on Folex sales and usage as opposed to the current summer heat. As we mentioned in our press release, our third quarter performance will also be driven by 2 added factors: Our shipments of metam soil fumigants and the amount of Dibrom mosquito adulticide that is used along the Gulf Coast region. Our leading soil fumigants franchise is not weather dependent, but clearly tropical storm moisture in the Southeast U.S. will be a driver for our mosquito vector business control. As we've indicated in previous conference calls, AMVAC's best of both worlds message for corn soil insecticide has gained significant traction in the Corn Belt over the last 2 seasons and our products are being purchased in increasing quantities as growers choose to supplement the ever -- the use of ever-improving genetically-modified seeds with these traditional, proven, crop protection defenses. As a result of the groundswell of demand for our soil insecticide solution, we are ramping up our production capacity again this year for those chemical products in a proprietary-closed delivery systems. At Axix plant, our -- it has expanded its operations to accommodate necessary production and our assembly of SmartBOX systems will triple to supply the demand of 2013 planting season. We are running 24/7 presently and expect to continue that level of production through the first quarter of next year. Our other major initiative in corn involves our post-emergent corn herbicide impact. As we have discussed previously, IMPACT has been selected by Monsanto based upon efficacy and crop safety to participate in the Roundup Ready weed management program. This co-marketing arrangement provides a financial incentive to corn growers to use IMPACT with Roundup and we are confident that the combined efforts of Monsanto and AMVAC sales and marketing teams will help promote a much wider use of AMVAC's IMPACT. As I've indicated in earlier conference calls, the production of IMPACT is complex and requires a long lead time. As a result, our supply availability for the 2012 season was limited. However, we resolved that limitation and we'll be able to address increased demand. We'll begin supplying IMPACT in the end of the fourth quarter and with most of the product moving to the market in the first quarter and early second quarter of 2013. Together, these 2 corn initiatives, corn soil insecticides and IMPACT, constitute AMVAC's yield enhancement solution, yes, for corn. Given the drought-related diminished corn yield of 2012 and the elevated corn commodity prices that are already evident, we believe that demand for our product will continue to build. Most growers will have the financial wherewithal and strong motivation to make up for 2012 shortfall by striving for maximum yields in 2013. Our company has many avenues to achieve growth, but it's clear that our participation as a significant player in the U.S. corn market is one of our main drivers. A few other major topics. Our proprietary Thimet continues its strong market presence as a preferred insecticide in peanuts, sugar canes and potatoes. We continue to benefit from the vacuum left of the withdrawal from the U.S. market of a competitive insecticide, aldicarb, which has allowed Thimet to become preferred replacement in a number of crop applications. Our non-crop business continues to develop well with Dibrom sales outpacing 2011 so far and the opportunity to recapture PCNB fungicide sales in the U.S. market during the second half of 2012. We are very enthusiastic about the new international structure, which we have established in the Netherlands under the leadership of Ad de Jong. This entity will serve to put greater emphasis on long-term international growth, give us improved access to foreign markets and enhance level of interaction with local regulatory authorities. We expect that in time, this new structure will also enable us to achieve a more advantageous overall tax position. As David mentioned, our ratio of net income to net sales has improved to 10.2% during the first half of 2012 as compared to 7.5% for last year. And we anticipate that this new international structure will allow us to achieve further improvements in this key metric. So to wrap up, AMVAC's product portfolio is well positioned as a part of the Integrated Pest Management approach that represents the future of modern agriculture in the United States and around the globe. We feel that the value of our offering is gaining wider recognition and our business has begun to reflect the demand that is emerging from our broad range of highly effective, proven crop protection tools. Our growth is being driven by strong agriculture demand and our increasing profitability is being driven by improving gross profit margins and operating expense control. Gross margins are benefiting from firm demand and the efficiencies of higher volume manufacturing. Together, these gross margin gains and operating expenses' strength have contributed to our significant net income acceleration. We have great confidence in our ability to identify and position ourselves to capitalize on many growth-oriented strategic possibilities. We hope that you share that confidence and benefit from our continued success. I'll now be happy to entertain any questions you may have. Rob?

[Operator Instructions] Our first question is from the line of Michael Cox of Piper Jaffray.

My first question is on the corn insecticide, herbicide portfolio. Now that you have the capacity expansion plans in place and you're producing for the 2013 season or preparing for that, what sort of feedback are you hearing from your distribution partners in terms of demand for 2013? Considering that you were sold out this past year, how are they proceeding or indicating their thoughts on demand for the upcoming planting season, which will prove to be another big corn planting year?

Very good question, Mike. I Actually have Jim Lehman, who is in charge of sales. So, Jim, do you -- you've had contact and discussion with our key distributors, what's the general thought process?

Absolutely, Eric. In regards to your question about distribution and the feedback that we're getting, the feedback has been very, very positive at this point in time. Initially, there were some concerns, as you well know, based on the drought effect that's taking place there in the Midwest. But as we look forward beyond 2012 into 2013, we actually see very strong demand for both corn soil insecticides and IMPACT coming from our distribution partners. We're looking forward to the upcoming season and we believe that demand will continue to grow, not just for 2013 but also beyond 2013 with our portfolio. What we're really seeing is the effect of growers looking to maximize the yield potential of the crops they're putting out there. And we believe that our traditional chemistry of our corn soil insecticide along with IMPACT are key components of helping them maximize those yields. So we see demand continuing to be strong and we're getting that feedback from our distribution partners.

Okay, that's very helpful. Another question on the product side. As I look at the cotton portfolio, you noted an uptick here in Bidrin here recently, which is encouraging. What are some of the -- or maybe walk me through the timeline of how we should be evaluating your cotton business? When we do need the rain? When would you rather not have the rain? I just would appreciate sort of a bit of a brief lesson on how we should think about the flow of product in the channel.

So from this step forward, and I assume your question is also for future seasons as well or you would just like...

Yes. As you look at moving into the fall and the harvest of cotton and Folex application, specifically.

So basically, the product Folex is used in combination with other defoliants. The season gets prolonged as long as the cotton plant is generating new leaves, which is as long as the weather conditions are, I'll say, normal, then you'll wind up with a longer season. You can't go in and harvest the cotton until you've stripped away the leaves, because you don't want the green to collate [ph] with the cotton fiber itself. So as it gets -- and of course, they have an incentive to let the cotton continue to mature to its full level. If you wound up with extreme burn down conditions and they go to harvest then that would wind up with the necessity of less Folex. But as the cotton gets harvested under normal conditions, then you're continually mixing Folex with other defoliants and desiccants in order to get the cotton leaves onto the ground.

Okay, okay. That's helpful. One question from a modeling standpoint, 3Q seasonality relative to the second quarter, last year, you were down about 8% in revenue quarter-over-quarter. How should I think about the sequencing of seasonality this year by comparison to last year?

Well, I think we are projecting good growth for the second half of the year. The fact that some of it comes as far as placement of product, I think we've discussed this before, that we've tried to move product closer to use periods as our customers have looked for that approach as well. We are -- as we are manufacturing this product, we are placing products with our customers, but that doesn't necessarily mean we would bill them at that time. But for the third quarter, again, I think we're expecting growth. As a reflection, again, this second quarter was a very strong quarter, and I don't know that we're looking to exceed that number for this third quarter. But profitability also looks strong.

Okay. So I guess I'm just -- so I'm clear, you're talking growth for the year-on-year but quarter-over-quarter or relative to 2Q, I don't want to put words in your mouth, but flat to down is what you're describing?

For Q3 versus Q2?

Relatively flat to up, yes.

You think flat to up?

Flat to slightly up.

Flat to slightly up. Okay.

Okay, that's very helpful. And then I guess one last question, if I could. If you can comment on the M&A environment, what opportunities you might see out there that you can comment on?

Yes, I mean we continue to look at opportunities and we think the climate is strong. We also picked up a couple more licenses on products, new chemistries that we'll be evaluating in this upcoming year. But I think there hasn't been any change in that climate so to speak. So, as we've said before, we're constantly evaluating, and negotiating, and looking at opportunities.

Our next question is from the line of Daniel Rizzo with Sidoti & Company.

You indicated that the adulticides that's next quarter could be dependent upon on, I guess, the Gulf Coast and the Southeast. Are you seeing a region like the traditional demand or is it, I mean, I don't think it's as warm there or as hot there as the rest of the country, has that area been affected at all?

The Debby depression/storm that came through definitely heightened some use of -- the pressure is, right now, stronger than normal. So we are already seeing a pretty robust season. It always -- it becomes an issue of additional storms that may come through. Every time they come through, 7 days later, you've got adult mosquitoes that need to be treated. So it looks to be a good year, the weather side of it being if there are additional storms that comes through, it would be even stronger.

Okay. And then with PCNB, I mean, I know that's more of a later in the year type of thing. But is that weather dependent at all? Do you need a cold or damp winter or anything like that, for demand?

Yes. Generally, it's preventative. So it's applied before the snow actually occurs. So it's put down at the end of the season, kind of September, October, November timeframe. So sales for that product are usually pretty strong in third quarter, and then finishing up in fourth quarter. And that's for the golf course use.

Our next question is coming from Mark Gulley of Gulley & Associates.

A couple questions, if I may. You sort of talked about the fact that many of your products are preplant products, Eric, but that will leave some that would be post-emergent. You addressed some of these issues briefly in your prepared remarks. Given the fact that some of these crops aren't worth saving, where do you see the most pressure versus normal demand trends for some of your products -- in the corn belt, I'm talking about.

So, yes. On the corn side, we're at plant as far as the corn soil insecticide. The herbicide impact is essentially past or post application. Our impact volume was pretty limited this year as we've talked about and we don't see that there are any inventories left of the product. So it tees up for certainly a strong 2013. And we don't have additional products that are major players in the corn market so...

Okay. You spoke optimistically about the sales of IMPACT for next year in terms of corn soil insecticides. What was insect pressure like this year and to the extent that, that could influence farmers thinking about next year, if they face limited pressure this year because of the drought, are they going to be less interested in that product line again for next year?

IMPACT is a herbicide, so -- but if you're talking about our corn soil insecticides?

I'm sorry, corn soil insecticides.

Well, I think as Jim pointed out, I mean, initial discussion would be, gee, are we thinking that this could have any influence on demand or slow down this rapidly driving demand for our soil insecticides, and the answer is no. Pest pressure increase, the more corn on corn acres that occur, again, it just keeps driving pressure up and it appears that pressure is not slowing down, so it is a strong pressure year even with the drought conditions. And going into 2013, again, this is a kind of a preventative, prophylactic application and it's not easy to see if you've got a pest pressure area that a $25 investment per acre in your crop seems pretty minor compared to the value that you're looking at given the commodity price.

Our next question is from the line of Richard Paget with Imperial Capital.

Just to piggyback on an earlier question where you talked about the seasonality of sales. If we look at the third quarter versus the second quarter over the last couple of years, the gross margin improved sequentially, just given pricing and mix, your expectation, I mean, should we think that trend continues or is second quarter probably the high point for the year in terms of gross margins?

We're pleased with where the margins are at this level. At this point, I don't know if we're anticipating increasing -- seeing increased margins from this level in 2000 -- in the third quarter. Our metam sodium is a large driver in the third quarter and those margins are slightly under the number that we did in 2000 -- in the second quarter. So I think that will maybe tamper any further growth. I mean, that being said, we are very pleased where the margins did come and then I think a reflection of the fact that our plants are running strong capacity and we've planned well for any kind of raw material price increases that we've seen.

Okay, so while it might not be necessarily be higher, it should be similar?

Well, we hope.

And then with some of the capacity expansions, maybe if you could just give us an update on what you expect for CapEx for the year.

Well, I think we're 13 so far this year, David?

Correct. And anticipating, guessing somewhat close to the mid-20s possibly, yes.

I think we may be more than halfway through but maybe another 10.

Yes.

Okay. And then finally, Eric, maybe you could comment a little bit more on the impact of the drought. I mean, I know you've already talked about the farmers line to maximize next year and there might be some more corn on corn acres. But does the drought do anything to the pest cycle, where maybe it kills more bugs that were in the soil this year or anything else we should think about going forward?

Hasn't in the past and as I said, the pressures were strong this year. So we don't see this dampening the momentum that we're gaining here for '13, '14, or '15.

Our next question is from the line of Brent Rystrom of Feltl Incorporated.

My -- well, actually I think it's a little of the opposite of all these previous questions. Don and I were in Illinois last couple of weeks talking to a lot of agronomists. They're saying that the rains have not been heavy enough to fully activate [indiscernible] the impact of the pursuit in the field. And actually because of that, you're going to see an even greater rate of corn on corn because you're not going to be able to plant beans where you've had any of these products next year, because there's going to be latent capabilities? Is that reasonable to you?

Jim?

Well, I think what you're talking about there, in talking to the agronomists, is that the fear is the potential carryover of the product to the following season. That potential's always there when you run into drought conditions like this. Now what you're talking about there are post-emergent compounds which have limited to no residual control. So the life of the herbicide in the soil itself should be very short. But you still need moisture to have that take place, dissipation of the product. So the potential is there and that potential could lead someone to make a decision to go corn on corn the following year. And if they make that decision to go corn on corn, it absolutely could increase the demand for corn soil insecticides going into next year.

It was literally in fields of Iowa, where they've been chopping for silage to get it off right before it dies. And so they're testing it and there -- a couple of fields I talked to said, yes, there's a lot of leave herbicide in here and we're not going to chance going to beans unless we really get a lot of moisture in the next 6 months. So from that perspective, are the corn soil insecticides, do they have a residual capability to carryover in the same fields? Or are they pretty much [indiscernible] ...

Yes. They dissipate fairly rapidly. So, yes.

From a timing of a pricing perspective, Monsanto kind of changed the program this summer. They've generally taken the Roundup pricing up 3% to 5%. They've done it over summer, a little bit differently than they've done in previous years, where they're announcing it and then taking the price up and everybody kind of jumps up in before the price increase takes effect in a few months. Did you guys do any pricing changes when Monsanto changed prices?

No, we haven't. We have not announced any price changes at this point in time for the 2013 season. But we do anticipate putting that information out to our distribution partners here within the next 30 days.

Okay. And then, finally, out of curiosity, are you hearing any rumors of another resistant insect in corn?

Not that we're aware of, unless you've heard of something out there in your discussions. I have not been made aware of anything of that nature.

I've heard there is a second one that showed up in Central Iowa. So I'm just curious if that's popped up with any of your people?

Are you speaking about resistance to the trait technology.

Yes, to the Bt trait, yes.

Okay. I hadn't heard about that. I knew there were some challenges in Central Illinois that weren't there the year prior. But I had not heard about that situation in Iowa. So we'll certainly look into that.

Our next question is from the line of Jay Harris of Goldsmith & Harris.

Eric, coming into this season, you were limited on the amount of impact that you could make available for sale. And I suspect that having sold out on corn soil insecticides, you're laying plans to have much more available. Percentage-wise, what will happen to the availability for sale of IMPACT for the 2013 season and for your corn soil insecticides?

On IMPACT, again, Jay, I know you like an absolute number but I'll just say it to be a multiple of this year. On the insecticides, we're looking somewhere at maybe a 50% kind of range.

Okay. Last year, there was a -- in the last half of the year, you did business with farmers prebuying for this year to shelter their taxes. I suspect because of the drought, that business will substantially disappear. Do you think you're early order business will more than mask that?

This last year, because we really are not looking for early pay. We did not offer really any strong incentives, I mean, but we'll still wound up with some. I think you need to keep in mind that those people look at the drought conditions and say, average yield is going to drop by x bushels. There are a lot of acres out there that are going to be 200-plus in a market that's over $8 a bushel. So I think there will be a lot of cash generated, but it's not something that we will actively try to gather at this point. As we talked about, our cash position is very strong.

Okay. As I look at the June quarter results, was the expansion in Europe the reason that the operating expenses rose from the first to the second quarter while your revenues dropped?

Yes, saw the revenues dropping. It is a little bit. We did have structuring costs with our accountants and legal to get the organization established. So that did have some impact on our G&A for the year -- for the quarter.

Were there other reasons why the operating expenses might have been up in the second quarter versus the first?

Accruals for compensation.

They rose?

Yes.

[Operator Instructions] The next question is from Jeff Abraham of [indiscernible] .

Obviously, as a shareholder, very pleased with the results. And as you pointed out, you guys have a substantial cash position. As a long-time shareholder, I know you guys have paid dividends consistently even during some of the leaner times. I was just wondering if there would be a good idea to send a signal to the investment community that you're comfortable with this growth and the increased profitability by passing some of that along in terms of an increased dividend. I think it would be a real strong signal that you're confident that the earnings were going to continue to grow. And obviously, it won't be to the extent of the growth that you have, but passing some of that along, I think, would be a real show of confidence.

I appreciate your comment and it will definitely be a topic at our next board meeting.

Okay, yes. Because like I said, I'm a long-term shareholder. You guys have consistently paid a dividend even in leaner times and the company is in great financial shape. And obviously, it wouldn't be to the extent where as the earnings grow, you pass along everything that you made. But even a higher degree of what you're doing presently would, I think, signify that you're very confident in the fact that the earnings are on this path not just for the short term but for the longer term.

Good point.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Okay. Well, again, I'd like to thank everybody for taking the time to join us today. We look forward to updating you with our plans as we continue through the balance of the year. And I appreciate your support. Thank you very much.

This concludes today's teleconference. You may now disconnect your lines at this time, and thank you for your participation.